New Book Points to Market Controls on Hedging
Regulators can be expected to add more controls on natural gas
and power risk management, which will add a layer of complexity and
discourage new hedging operations, according to two close observers
of the industry.
"It is foreseeable for power producers and marketers to be
supervised like the banking industry," say Ruben Moreno and Douglas
M. McDonald of Pace Global Energy Services, of Fairfax, VA, writing
in a recently compiled book, Natural Gas Industry Analysis.
Imposing capital and reporting requirements similar to those on the
banking industry on gas and power hedging should provide some
margin of safety against the number and size of contract defaults
and even bankruptcies that tend to occur when prices skyrocket, the
The movement towards increased regulation has already begun in
the accounting rules that govern the industry, which are set by the
Financial Accounting Standards Board. Currently seen as one of the
challenges facing the industry, Financial Accounting Standard 133
and its progeny "will make the accounting of hedging more
strenuous, and may actually encompass a large number of operations
under the 'derivative' concept," the Pace analysts said.
Companies that might otherwise enter the hedging operation will
see the increasingly time-consuming, confusing, and complex nature
of risk management and be discouraged from it.
If this happens, it will put the brakes on an industry that the
authors point out has substantial potential for rapid growth. The
forces for growth include new kinds of transactions that can be
derived from convergence of fuels; the internationalization of the
industry, creating international price transparency and thus
further risk management; and the fact that with 10 years experience
now available, the application of more state-of-the art techniques
is now possible.
The future of risk management in the industry is just one of the
topics in the wide-ranging Natural Gas Industry Analysis, which
includes chapters by 34 industry contributors. For more information
call the Financial Communications Co. at (877) 520-NGIA or go to
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